Major Bank/Credit Union Regulatory Changes that Affect You!

Since our nation’s financial crisis in 2008, there have been SEVEN regulatory announcements or Congressional Acts that all have one thing in common - the separation of the lending process from the appraisal process. But that's not all! The new regulations require the community banks to review the appraisal and the evaluation, making the lender responsible for the quality of the report. The last of the regulatory announcements (the 2010 Interagency Appraisal and Evaluation Guidelines) not only further strengthens the government's position on this but goes much farther. Below, in chronological order, are the seven regulatory changes with a short history. For a full discussion on each individual regulation, along with excerpts from these regulations that clarify and focus the intent, just click on the following pages.

Our country's real estate lending laws, banking regulations, and appraisal requirements have gone through and are still going through some of the largest changes in our history. It can be daunting, but in the same way, exciting, as our financial industry becomes stronger than ever.

May 1, 2009: The Home Valuation Code of Conduct (HVCC)

As most people in the mortgage lending industry know, this was the compliance date for the Home Valuation Code of Conduct (HVCC), which sharply drew the lines that no one from the loan production side of lending was to have any part of the appraisal ordering function. Ninety days after the signing of the Dodd-Frank Act, in July 2010, was the sunset of the Home Valuation Code of Conduct. But the requirements of the Dodd-Frank (as shown in the Federal Reserve’s Interim Final Rule) and the 2010 Interagency Appraisal and Evaluation Guidelines clearly reinforced all aspects of the former HVCC.

February 15, 2010: FHA Appraiser Independence

This was the compliance date for FHA Mortgagee Letter 2009-28. This letter reiterated the importance of appraisal independence and stated new requirements for that independence, stated FHA's position on the use of third parties for appraisal management companies (AMCs), appraisal fees (customary and reasonable), reaffirming and stating new appraiser independence safeguards.

July 21, 2010: The Dodd-Frank Act

The Dodd-Frank Act was signed into law on this date by President Obama. The act covers many areas of financial reform, but there is a portion specifically for appraisals and mortgage financing. The Truth in Lending Act (TILA) was amended, while directing the Federal Reserve Board to establish new requirements for appraisal independence. Dodd-Frank essentially codifies the 2008 Appraisal Independence Rules, and EXPANDS on the protections in those rules (the 2008 Appraisal Independence Rules were removed with the announcement of the 2010 Interim Final Rule). One of the expansions is that the Appraisal Independence Rules applied to only closed-end loans; Dodd-Frank and the 2010 Interim Final Rule apply also to home-equity lines of credit (HELOCs). This legislation required community bank/credit unions, and their agents, to pay the “customary and reasonable” fee to the local appraiser. There are serious financial fines for those companies who do not.

In response to the Dodd-Frank Act directive to sunset HVCC within 90 days of the signing of the act, Fannie Mae announced their Appraiser Independence Requirements in the Selling Guide (Announcement DEL-2010-14). The announcement stated these were developed to "replace the Home Valuation Code of Conduct (HVCC)". Go to the drop-down tab labeled "Fannie Mae/Freddie Mac Appraiser Independence Requirements" to read short excerpts and/or the complete announcement. The HVCC is not "gone" but codified into Fannie's Selling Guide.

October 15, 2010: Freddie Mac Bulletin 2010-23: New Guide Exhibit 35

This is Freddie Mac's response to the HVCC sunset, and is very similar to Fannie Mae's response.

October 28, 2010: Federal Reserve Board Interim Final Rule

The Final Rule addresses Appraiser Independence and also issues surrounding the increasing use of Appraisal Management Companies (AMCs) by lending institutions. The Final Rule refers to HVCC, with a reaffirmation of its appraiser independence requirements, and also the Interagency Appraisal and Evaluation Guidelines (IAG, announced on December 2, 2010, compliance date of December 10, 2010), which placed even more emphasis not only on appraiser independence, but placed responsibility for the quality of the report on the community bank/credit union. AMC licensing by state was mandated as well as paying a “reasonable and customary” fee to the local appraiser.

December 2, 2010: The Interagency Appraisal and Evaluation Guidelines (IAG)

The agencies involved are the Federal Reserve Board, OCC, FDIC, OTS, and NCUA. This final regulatory announcement, which concentrates on real estate appraising in the lending process, goes even further than Dodd-Frank, the Federal Reserve Interim Final Rule, or the Fannie/Freddie Selling Guide announcements. Community banks/credit unions need to review these guidelines in depth, as it may significantly affect the institution's safety and soundness exam.

With each new announcement or law that came into effect, the emphasis on appraisal and evaluation independence from the loan processing and originating staff was a constant. With the final announcement of the Guidelines, the attention was still on appraiser independence but was also expanded to the quality of the report. The 2010 Interagency Appraisal Guidelines make the LENDER responsible for the quality of the appraisal report in a way they have never been before.